Taking tax-free cash

There’s a great deal of flexibility about how you use your pension savings. You have a number of options for how you can use your pension savings as retirement income, such as taking a regular income, taking ad hoc lump sums as and when you need them, setting up a guaranteed income by purchasing an annuity or you can go for a combination of options. No matter which option you choose, you will probably be able to take 25% of your pension savings as tax-free cash.

While the main aim of a pension is to give you an income throughout your retirement, you have the flexibility to take out lump sums whenever you want from the age of 55 (but this is due to rise to 57 from 6 April 2028) – and, in most cases, up to 25% of the total value of your pension can be withdrawn tax-free.

There are several ways you can take money out of your pension, depending on what you need and what you’re planning to do in retirement:

1. Just take the tax-free cash – you take out a tax-free lump sum (you can normally take up to 25% of any funds as a tax-free lump sum, as long as this amount is not higher than your available allowances) and leave the rest invested until you decide to make more withdrawals or set up a regular income.
2. Take less than the tax-free allowance – if you don’t need all your tax-free cash, you don’t have to take it all at once. Just withdraw as much as you want and whatever is left can be taken later. If your pension savings rise in value, this could mean you could take a larger total amount tax-free.
3. Take more than the tax-free allowance – you can take as much out of your pension savings as you want, all the way up to its total value. Just remember that anything over the tax-free allowance will be subject to tax, as if you had earned it from a job.
4. Take out a lump sum, with 25% tax-free – this is technically known as an Uncrystallised Funds Pension Lump Sum (UFPLS) and it means you can normally take up to 25% of any funds as a tax-free lump sum (as long as this amount is not higher than your available allowances) with the rest taxable with the rest taxable as if you had earned it from a job.

Please remember that tax treatment depends on individual circumstances and all tax and pension rules may change in the future.

A couple of questions to ask yourself first

Taking cash from your pension may sound appealing, but there are two questions it’s worth asking yourself first.
 

• Do you want to keep building up your pension? If you (or your employer) wants to make further contributions into your pension plan, you’ll probably want to consider options 1 or 2 above. This is because if you take a taxable payment from your pension, your annual allowance (the total amount you can pay into pensions with the benefit of tax relief) will be cut to just £10,000 a year. This is known as the money purchase annual allowance and it can make it much harder to build up your savings in the future. Our factsheet has more information.
• Will you still have enough for your retirement? You could have many years of retirement to look forward to, so taking out too much too early could cause problems for you down the line. 

A few more things to keep in mind

• If your pension savings end up being worth more than your allowances, you could face a tax charge on the excess. This could be charged when you take a lump sum or an income from your pension pot.
  
  Read more about the lump sum allowance

• If you have several pensions (which is not unusual if you’ve changed jobs during your career), you could consider bringing them together to make life easier.

• If you’re not sure about taking tax-free cash, please remember you don’t have to. You can leave your money invested until you’re more certain about your plans.
• If you die over the age of 75 without using your full tax-free cash allowance, your beneficiaries may have to pay tax on the money.
• Taking tax-free cash is just one aspect of how you can use your pension savings. We have lots of information to help you with your income options.